Sir Iain Vallance, BT's chairman, yesterday threw down the gauntlet to the authorities by delivering a powerful warning that he may not accept sweeping new anti-competitive powers being sought by Oftel, the industry regulator.

BT must accept the proposals by Don Cruickshank, director general of Oftel, or find itself in the hands of the Monopolies and Mergers Commission.

Speaking at a meeting of the Policy Studies Institute, Sir Iain said that Oftel's proposals would "stifle innovation, reduce BT's efficiency and add to consumers' costs". He added: "I am answerable to shareholders and customers. How can I be expected to go along with this?"

Sir Iain accused Mr Cruickshank of having "ambitions to become an untrammelled competition authority as well as a regulator", and of also wishing to be manager. He said that the watchdog had become increasingly preoccupied with driving down BT's market share at the expense of his other responsibilities.

Sir Iain, whose speech came within hours of Oftel's first public hearing on the issue, added: "It is my belief that the director general's current proposals presage a highly dangerous new form of regulation, with broad and undefined discretionary, or absolute, powers vested in a single individual."

Sir Iain, who argues that investors need more regulatory stability, added: "By entering the ring on the side of BT's competitors the referee is stepping outside his legitimate role and distorting competition in the marketplace."

The changes sought by Mr Cruickshank involve the creation of a single general condition in BT's licence and those of its rivals, which would enable him to deem what is anti-competitive behaviour and order it to stop while an investigation takes place.

At present a complex series of individual licence conditions relates to competition and he has no ability to stop alleged anti-competitive behaviour until the case is proven.

Speaking at his morning meeting, Mr Cruickshank said: "Too often in the past, regulation has been after the event. There is a tendency to try things until the regulator intervenes - to do something until stopped." His proposal would also allow damaged parties to bring legal action earlier if they have been proved hurt.

Mr Cruickshank added: "The telecommunications market is different from that in other goods and services in that it is still heavily dominated by one vertically integrated company."

Wayne Gowan, chairman of the Cable Communications Association, argued that the Oftel proposals did not go far enough. Professor John Kay, of the London Business School, said that in embracing a general anti-competitive approach, Oftel would be taking "absolutely the right way" ahead.